Investors Use Short Term Loans to Flip Foreclosed Houses

Flipping houses for profit

How many foreclosures on your block?

Real estate investors are using short term loans to flip houses once again. A few years ago flipping homes was all the rage. Millions of Americans tried making money by buying and then quickly reselling new houses and condominiums. Some put a few thousand dollars into renovations and upgrades and then shot the price up tens-of-thousands and put it back on the market. It was a lucrative way to make fast cash, if you were smart about it. After a few years of successful home flipping, sales started to stall as a result of changes in lending practices and surges in foreclosures.

Foreclosure auctions post-recession

Now that the recession is over and things are leveling off, there’s a new type of house flip. This time people are working through foreclosure auctions to find the perfect home to buy. Investors are looking for properties that seem like good deals in relatively stable areas. The new house-flipping investor needs cash as well as resilience.

Damon Linus, an executive at PosterProperties.com, stated, “Sometimes you have half an hour to make a half-million dollar decision. That’s something most people can’t or aren’t willing to do.” In states where home prices were particularly hurt, available real estate consists mostly of foreclosure properties. Barclays Capital estimates that banks now own over 639,000 foreclosed homes throughout the nation. Most are in Florida, Michigan, California, Arizona, and Nevada.

The draw of flipping a foreclosed home

Not surprisingly, the draw of looking for a foreclosed property to flip is price. Normally, at a public auction, the lender sets a minimum bid on the property. If no one bids more, then the bank takes possession of the house. In past markets, the minimum bid established by the bank was equal or nearly equal the amount of mortgages and other encumbrances on the property. In today’s market, however, lenders realize that home values have dipped so low that if they stuck to the same rule, they wouldn’t sell anything. For that reason you can easily find a lender that deeply discounts a home in an effort to attract investors.

Donald Kline, an investor in Las Vegas, Nevada, said, “Normally we go to the auction with a good chunk of money and we know we’ll get it. Our office has already done their research and we know the market. There may be a few thousand in difference, but that can easily be found to make the buy.” Investors have pools of money for this purpose, and those who don’t can get short term loans to fill the financial gap.

The trend in investor buys

While many homes end up bank-owned, a growing number are moving into the hands of investors. ForeclosureRadar.com reported that in November about 21% of homes sold in trustee sales went to investors, rather than banks. That’s up from just 6% a year ago. Banks love investors because they get money for their property up front and don’t have to go through the arduous and expensive process of listing and selling the house. Banks sell foreclosed properties “as is,” meaning they don’t do repairs or take responsibility for certain kinds of defects.

The future of house flipping

House flipping is on the rise and isn’t likely to slow down in the foreseeable future. According to a U.S. survey, 7.5 million homes now have mortgages in arrears or are in foreclosure, and that means banks are working hard to recoup losses. Investors are a godsend to many banks. They walk in with cash-in-hand via short term loans or personal finances, and save the day.